Payments to foreign contractors, done properly

Advertised prices, verified

How paying a foreign contractor works

1. Document status before the first payment. Collect the appropriate IRS withholding certificate, typically Form W-8BEN for individuals or W-8BEN-E for entities, before any money moves. The form certifies the payee is a foreign person and the beneficial owner of the income, and it is your file evidence for why US withholding and domestic information returns were handled the way they were.
2. Contract the work as genuine contracting. A written agreement should describe deliverables, the contractor's control over how and when the work is done, their own equipment, and freedom to serve other clients. Local law in the contractor's country judges the substance, not the label, and misclassification exposure sits there as much as in the US.
3. Choose the payment rail deliberately. International wires, multi-currency accounts and contractor payment platforms differ on fees, exchange-rate margin and speed. The FX spread is usually the largest hidden cost; compare the rate you are offered against the mid-market rate for the same day before deciding, and agree the invoice currency in the contract.
4. Keep the file current and review the relationship. Withholding certificates expire and circumstances change; recollect them on the payee's change of status and on expiry. Reassess the relationship periodically: rising hours, exclusivity and integration into your team are the signals that the arrangement should convert to employment through an entity or an EOR.

The US tax mechanics, in plain terms

The controlling idea is the source of the income. Under IRS sourcing rules, compensation a foreign person earns for services performed entirely outside the United States is foreign-source income, and payments of it by a US company are generally outside the US withholding and reporting regime that applies to domestic contractors. That is why the W-8 series matters so much: the certificate documents that the payee is a foreign person, so that the payments are treated on that basis rather than defaulting into withholding designed for undocumented payees.

The picture changes when any part of the work happens on US soil, when the payee is actually a US person living abroad, or when the payment is something other than services compensation, such as royalties. Days worked inside the United States can pull a slice of the income into US source and into withholding, and a US citizen contractor abroad remains inside the US tax system regardless of address. When a relationship touches any of these edges, the mechanism to apply stops being generic and the fee for an hour of specialist tax advice is cheap against the cost of guessing.

Misclassification: the risk that dwarfs the fees

Most countries decide employment status on the facts of the relationship: who controls the work, whose tools are used, whether the person serves one client or many, and how integrated they are into the paying company's operations. A contractor who works your hours, in your systems, under your managers, for years, is an employee in substance in most jurisdictions, and the local consequences of that finding, back social contributions, benefits, severance and penalties, land regardless of what the contract says. The paying company's exposure is in the contractor's country, under that country's law, which is why a US-drafted contract clause is weak protection.

The practical control is a periodic honest review. If the engagement has become long-term, exclusive and directed, price the compliant alternative: employ the person through an employer of record in their country, which converts the relationship into documented local employment with payroll, contributions and statutory benefits handled by the legal employer. The EOR fee is the visible cost; the invisible comparison is against a misclassification finding arriving with several years of arrears attached. The vendor table on this site shows verified published pricing for exactly that conversion path.

Paying well: rails, currency and records

On cost, the exchange-rate margin usually matters more than the stated transfer fee. A rail advertising free transfers can price several times more expensive than a flat-fee wire once the spread is counted, so compare the offered rate to the mid-market rate on the day, in both directions of the corridor you actually use. Agree in the contract which party carries transfer fees and which currency the invoice is denominated in; letting each invoice decide invites disputes and makes your cost accounting noisy.

On records, keep a per-contractor file holding the signed agreement, the current withholding certificate, every invoice and proof of payment. The file is what turns questions from a tax authority, a bank's compliance team or an acquirer's diligence into a short email rather than a project. Contractor payment platforms bundle much of this record-keeping with the transfer itself, which is a genuine part of their value beyond the payment rail; weigh that bundle against its subscription cost for your volume.

Common questions

Do I withhold US tax when paying a foreign contractor?

Generally not when the payee is a documented foreign person and the services are performed entirely outside the United States, because the income is foreign-source under IRS rules. Collect the W-8 certificate first; work performed inside the US or an undocumented payee changes the answer.

Do foreign contractors get a 1099?

The 1099 regime is aimed at US persons. A foreign contractor documented on a W-8 form performing services abroad generally sits outside it, which is precisely why the certificate should be collected before the first payment rather than at year-end.

When should a contractor become an EOR employee?

When the facts look like employment: long tenure, exclusivity, your hours and systems, your direction. At that point local law tends to see an employee whatever the contract says, and converting through an employer of record in their country is the compliant path.

What is the biggest hidden cost in paying contractors abroad?

The exchange-rate spread. Transfer fees are visible and small; the margin between the rate you are given and the mid-market rate is often the larger cost. Compare rates on the same day across rails before standardising on one.

Coverage by country

• Employer of record vendors covering Singapore
• Employer of record vendors covering Mexico
• Employer of record vendors covering Spain
• Employer of record vendors covering Colombia
• Employer of record vendors covering United Kingdom
• Employer of record vendors covering France
• Employer of record vendors covering Hungary
• Employer of record vendors covering New Zealand